Everything you need to know about advertising agencies.

An advertising agency is composed of creative and business people – the writers and artists, showmen and market analysts, merchandising and research people, advertising specialists of all sorts.

But with all this, they are business people, running an independent business, financially responsible, applying their creative skills to the business of helping to make their clients advertising succeed.

The work that advertising agencies do is described in the “Agency Service Standards” of the American Association of Advertising Agencies.


These Service Standards, a delineation of fundamentals of successful agency operation, enable advertisers and media to know what to demand and agencies to know what may be expected of them in dealing wit the problems of advertising.

Agency service, according to the “Agency Service Standards”,consists of interpreting to the public or to that part of it which it is desired to reach, the advantages of a product or service.

Learn about:-

1. Definitions of Advertising Agency 2. What Advertising Agencies Do? 3. Basic Principles of Advertising Agencies 4. Types 5. Functions 6. Factors Affecting Selection of Advertising Agencies 7. Role


8. Arrangement of Advertising Agency 9. Selection 10. Changing Concept 11. Client-Agency Relationship 12. Different Departments of Advertising Agencies 13. Advertising Agency Remuneration.

Advertising Agency: Definitions, Principles, Types, Functions, Role, Changing Concept, Remuneration and Other Details


  1. Definitions of Advertising Agency
  2. What Advertising Agencies Do?
  3. Basic Principles of Advertising Agencies
  4. Types of Advertising Agency
  5. Functions of Advertising Agency
  6. Factors Affecting the Selection of Advertising Agency
  7. Role of Advertising Agency
  8. Arrangement of Advertising Agency
  9. Selection of Advertising Agency
  10. Changing Concept of Advertising Agency
  11. Client-Agency Relationship
  12. Different Departments of Advertising Agency
  13. Advertising Agency Remuneration

Advertising Agency – Definitions Provided by Philip Kotler, Rozer, Borton and American Association of Advertising Agency

A firm engaged in providing services of advertisement for clients to create awareness and market for them is known as advertising agency. These agencies involve people with specialized skills and knowledge who are well versed in marketing, advertising and consumer behavior. These experts combine their talent to create advertisement for their clients. Therefore, an advertising agency is a specialized organization helping its clients to adopt advertising for marketing their goods and services in most effective manner.

According to American Association of Advertising Agency an advertising agency is one –


i. Which is an independent organization.

ii. Which is composed of creative and business people.

iii. Who develop, prepare and place advertisements in media.

iv. Which is for sellers seeking to find customers for their goods and services.

Philip Kotler opines that “Advertising agency is a marketing service firm that assists its clients in planning, preparing, implementing and evaluating various activities of advertising campaign.”

Another view expressed by Rozer and Borton is that “Advertising agency is a group of persons who have a specialization in advertising. It includes ad copywriters, ad designers, media selectors and advisors for various advertising issues”.

From the above definitions, the common features can be identified as:

1. Advertising agency is an independent business organization.

2. Agency provides services to its clients who are searching customers for their goods and services.


3. Agency employs the experts, researchers etc.

4. Agency performs the functions like planning, implementation of campaign, research, follow up advertisement, measuring effectiveness of various media for its clients.

5. It charges fees, service charges and commission from its clients.

It is emphasized that an advertising agency is an independent business organization independently owned, and not owned by advertisers or media or suppliers—which brings to the clients’ problems an outside objective point of view made more valuable by experience with other clients’ sales problems in other fields. It is independent of the clients so as to be always an advocate of advertising (seeking to apply advertising to help clients grow and prosper); it is independent of media and suppliers so as to be unbiased in serving its clients (the sellers of goods and services).


An advertising agency is composed of creative and business people—the writers and artists, showmen and market analysts, media analysts, merchandising and research people, advertising specialists of all sorts. But with all this, they are business people, running an independent business, financially responsible, apply­ing their creative skills to the business of helping to make their clients’ advertising succeed.

These people develop, prepare, and place advertising in advertising media, seeking in every way they can to apply advertising to advance their clients’ business. Every­thing that goes before and everything that comes after the adver­tisement is preparation of advertising follow up to help make it succeed. The agency does this, not for itself, but for sellers’ goods and services. To prepare and place advertising—successful adver­tising for the advertiser—is the primary purpose of the advertis­ing agency.

Advertising Agency – What Advertising Agencies do?

The work that advertising agencies do is described in the “Agency Service Standards” of the American Association of Advertising Agencies. These Service Standards, a delineation of fundamentals of successful agency operation, enable advertisers and media to know what to demand and agencies to know what may be expected of them in dealing with the problems of advertis­ing. Agency service, according to the “Agency Service Standards,” consists of interpreting to the public or to that part of it which it is desired to reach, the advantages of a product or service.

This interpretation is based upon:


(1) A study of the client’s product or service in order to deter­mine the advantages and disadvantages inherent in the product itself, and in its relation to competition.

(2) An analysis of the present and potential market for which the product or service is adapted –

(a) As to location.

(b) As to extent of possible sale.

(c) As to season.

(d) As to trade and economic conditions.


(e) As to nature and amount of competition.

(3) A knowledge of the factors of distribution and sales and their methods of operation.

(4) A knowledge of all the available media and means which can profitably be used to carry the interpretation of the prod­uct or service to consumer, wholesaler, dealer, contractor, or other factor.

This knowledge covers:

(a) Character.

(b) Influence.


(c) Circulation –

(i) Quantity.

(ii) Quality.

(iii) Location.

(d) Physical requirements.

(e) Costs.


Acting on the study, analysis, and knowledge as explained in the preceding paragraphs, recommendations are made and the following procedure ensures:

(5) Formulation of a definite plan and presentation of this plan to the client.

(6) Execution of this plan –

(a) Writing, designing, illustrating of advertisements, or other appropriate forms of the message.

(b) Contracting for the space, time, or other means of adver­tising.

(c) The proper incorporation of the message in mechanical form and forwarding it with proper instructions for the fulfillment of the contract.


(d) Checking and verifying of insertions, display, or other means used.

(e) The auditing and billing for the service, space, and prep­aration.

7. Cooperation with the client’s sales work, to ensure the great­est effect from advertising.

These are the elements of agency service, whether all of the functions above are shared by a few persons of each function is carried on separately by a specialized department. Into this pat­tern fit account executives who contact the client, art directors, copywriters, space and time buyers, researchers, production peo­ple, and others who work in advertising agencies.

Advertising Agency – Basic Principles: Client-Agency and Agency-Media Relationship

Basic Principles of Client-Agency Relationship (Car):

These principles are:

(i) The agency avoids advertising a close substitute competing product. The client, too, avoids engaging the services of another competing agency.

(ii) The agency receives the green signal from the client for all the expenses incurred on its advertising.

(iii) The agency keeps the media commission for itself and the client undertakes to foot the bill promptly.

(iv) If the media grants any cash discount, it is passed on to the client.

(v) The agency is not taken to task for media lapses in terms of scheduling, positioning, etc.

Basic Principles of Agency-Media Relationship:

These principles are:

(i) The agency alone is responsible for payment to the media.

(ii) The agency does not allow any cut from the commission received from the media to go to the client.

(iii) The media do not discriminate amongst the agencies dealt with and follow a uniform policy for all the agencies.

(iv) The media do not alter the advertising material without the prior consent of the agency.

The average tenure for a client-agency relationship is 9-10 years in India and about 5-7 years in the developed countries. The frequent client-agency breaks now are attributed to more involvement of top management in ad decisions and more changes in the top management itself. Global alignments also affect the local accounts.

Some clients keep separate agencies for handling different categories worldwide. A client may walkout whenever there is a brand or creative fatigue. Creative agencies generally have shorter tenures, because they tend to continue a particular creative even when the market situation changes.

When an agency is changed, generally a brand is repositioned, e.g., Thums Up was a fun brand. Then it became a “taste the thunder brand”. Now it is ‘I want my thunder’ brand. While such repositioning is done, the core values of the brand are kept constant.

Do’s and Don’ts While Selecting an Agency:


i. Do look for a big idea or else your ad will be lost in a clutter.

ii. Do ensure that the ad is relevant to the product.

iii. Do hanker after the desired brand image.

iv. Do resist the temptation of creating an ad yourself.


i. Don’t bargain hard on agency’s compensation.

ii. Don’t drop the agencies for the hack of it.

Advertising Agency – 2 Major Types: Full Service Agencies and Specialized Agencies

There are mainly two types of agencies based on the type of services offered by them.

They are:

1. Full Service Agencies:

These are the medium or large sized agencies capable of conducting complete advertising campaign. The main agency may be assisted by many subsidiaries engaged in various other related activities like market research, sales promotion, advertising, public relation, media buying, film production etc. Thus, these agencies are capable of handling all the various related activities of advertisement from beginning to end.

2. Specialized Agencies:

These are the agencies which provide only one or selected services out of the entire range services. Those agencies do not have specialization in all services or not supported by other specialized subsidiaries. The firms willing to get only a part of whole range of services may go in for specialized agencies. For instance, creative Boutiques and Media Buying Agencies.

These agencies get their charges in any form of – (i) Commission – A fixed rate of commission (ii) Fees – In addition to commission, it may insist for payment of fees, (iii) Percentage charges – agency charges some percentages of charges as mark up when agency buys some services from outsiders, (iv) Incentives based system – The fees here are based on how best the agency performs in achieving the pre-determined goals.

Advertising Agency – Top 4 Functions: Research, Creating Advertising, Media Buying and Ad Placement and Providing Ad-On Service

Function # 1. Research:

Advertising agencies carry out various types of researches to facilitate the advertising process. These research activities relate to consumers, market and the product. Through consumer research, agencies determine consumers’ perceptions about the product’s strength and weaknesses.

Also, the way a product is positioned or a new product to be positioned in consumers’ mind is being determined on the basis of research inputs only. The understanding of consumers’ level of awareness, their attitudes, beliefs and knowledge about the product helps agencies in determining communication problem(s) and the formulation of appropriate communication strategy relating to the product concerned.

The formulation of communication strategy also depends on the understanding of market dynamics such as its size, composition, and geographical spread, preferences for the type of media, media reach, the competitors and their communication strategies relating to the market and so on.

Agencies try to work out the communication strategy in the light of market dynamics so as to have desired approach to the market and also to negotiate for buying the appropriate media.

Agencies also undertake product related research to develop knowledge for developing creative concepts. The product knowledge relates to ingredients, quality, features, design and packaging of the product. Though creative concept is based on product’s strengths relating to these aspects of the product, developing a creative concept is a matter of creativity.

Mostly, creative process is followed to develop the creative concept which contains five steps:

a. Immersion, which means gathering information and raw material through background research and immersing oneself in the problem.

b. Digestion, is taking the information, working it over, and wrestling with it in the mind.

c. Incubation involves putting the problem out of one’s conscious mind and turning the information over to the sub conscious mind to do the work.

d. Illumination is the stage of the birth of an idea—happening of ‘Eureka’ phenomena.

e. Reality or verification is the studying of the idea to see if it still looks good or solves the problem and then to shape the idea to practical usefulness.

Agencies gather information about consumers, markets, competition, and any other relevant information both informally and formally to assist in preparation incubation and illumination stages. Formally, proper research is conducted either by the agency itself, or by the client, or by media or by some other specialist source.

The agencies provide research based information to creative specialists for use as an input to creative process. Agencies also provide them the books, trade journals, clippings, newspaper articles, etc. containing the information relevant to product, market and consumers.

The informal sources of information, on the other hand, include general reading, talking to those who are involved in product as designers, salespeople, engineers, consumers, listening to what people talk about the product, experiencing the product and becoming familiar with it, and working in and learning about clients’ business.

Besides fact finding research on consumers, product and market, advertising agencies are now conducting psychographic studies to construct the lifestyle or psychographic profiles of product users. Moreover, a numbers of agencies are now even conducting branding research to help better understand and identify clients, customers and how they connect to their brands.

Agencies and particularly large agencies with strong research departments have their own research programmes and techniques to conduct qualitative researches such as in-depth interviews or focus group studies. These qualitative researches provide valuable insights into the early stages of creative process.

Function # 2. Creating Advertising:

It is the core competence of most of the agencies whether large or small in size. The creation of advertising function includes various activities relating to its writing, designing and producing ads. The copy writers develop the message copy, its headlines, slogans, tag lines, and body copy.

The art directors carry out the designing of an ad in terms of its colour, contrast and pictures. The production of the ad as per the specifications given in the layout is done by the producers. Advertising agencies provide the environment and facilities to these people having specialized skills as it is through their interactions and elaborative efforts that the creation of advertising takes place.

Function # 3. Media Buying and Ad Placement:

In view of growth in media option/opportunities causing media fragmentation, placing an ad with media has become one of the important decision requiring whole lot of data based discussions and deliberation. Agencies role in placing ads with the media goes back to its traditional association with the media.

Being sellers of space in media, overtime agencies have evolved into buyers of space and buy media time and space on behalf of the advertiser. Being in the business of creating advertising, agencies are generally more close to media and hold more information and knowledge about media scenario. Because of specialized skills, agencies are also better equipped to negotiate while buying media time and space.

Function # 4. Providing Ad-On-Services:

Clients now expect from their agencies to provide additional services and not just advertising. This is another functional area of advertising agencies which includes the provision of services concerning preparation for printing of sale material, publicity campaigns, other sales materials, sales meetings, etc.

Since clients expect a package solution to their varied communication needs, more and more agencies, especially large agencies, are getting into the business of providing one-stop-shop offer to their clients. They either acquire or hire the specialists divisions having competencies in regard to various additional services.

The advertising agency co-ordinates between various specialist divisions and, thus, provides integrated solution to the communication needs of the client. Overtime, agencies have become the provider of total communication solutions and not just advertising as a solution to communication needs of the client.

Depending upon the functions performed by the agencies and the services rendered to the client, these agencies are grouped either as large or small size agencies. The large size agencies are usually the full service agencies providing the entire breadth of services to the client. Small agencies, on the other hand, are the specialized kind of agencies which offer only one or few of the services to their clients.

Advertising Agency – Factors Affecting the Selection of Advertising Agency: Agency Team, Range of Services Rendered, Research Activities, Success Rate and a Few Others

The advertisers should consider the following factors while selecting an advertising agency:

1. Agency Team – An agency has to possess management experts, market researchers, production managers, art directors, copy writers, media experts and others. The quality and expertise of these specialists team is considered while finalising the agency.

2. Range of Services Rendered – An agency may be full services agency or specialized agency. An advertiser should keep in mind the type of services required to be hired.

3. Research Activities – Advertising agency should consider the type of research activities conducted by companies. Because there are market research companies or advertising research companies or both.

4. Success Rate – The advertisers may look at the various accounts already handled by an agency and the success rate.

5. Need of Marketing Plans – It is necessary to see whether the assistance in preparing the marketing plans can be provided by the agency. In case of clients with new products, it is necessary to consider this factor.

6. Compatibility – It means the personal equation of the advertiser with the client. There can be perfect harmony and cordial relation between client and agency when there is compatibility.

7. Stability of Agency – The selection of agency depends upon the regular and stable services provided in that line. Its commitment in fulfilling the accepted tasks is noteworthy. The known agencies are preferred to the new ones.

8. Creativity – Advertising needs creativity. An agency having good team of creative persons is selected. Because, it is main factor in making advertisements different and attractive.

Advertising Agency – Role of Advertising Agencies

Since 1841 when the concept of advertising agency took its birth, the agencies have evolved for their role in advertising process. To begin with, agencies were merely the space sellers, selling space to advertisers and were paid by the space owners, i.e. media houses like newspaper publishers.

With the change in scenario on demand and supply of media space and time, these agencies started working as agents for advertisers and became space buyers instead of space sellers. Advertisers pay the agencies for their services by way of fixed percentage usually 15 per cent commission on media bills.

While representing advertisers, the agencies try to negotiate the lowest possible rates with the media houses. Primarily, the functions of agency include planning, preparing and placing ads with media.

However, overtime there has been a realization among both the advertisers and the agencies that although advertising has its significance in communicating with target market, yet ad agencies and their media advertising constitutes only one part of client’s total communication and marketing mix.

The other parts include sales promotion, public relation, direct marketing and so on. As a consequence, there has been a shift in marketing expenditure away from advertising and into sales promotion and direct marketing, etc. At the same time, there is an intense desire on the part of the client for integrating various marketing communication tools to have singularity in their communication with target market. These changes certainly have their fallout on agency’s role in marketing and advertising process.

With the growing idea of integrated marketing communication, agencies are changing in terms of their perspective and, are offering not simply their media advertising capabilities, but their other capabilities as well. The idea is to better serve client’s total communication needs. Agencies adapted themselves by floating special divisions offering specialized services and branded themselves as one-stop-shop offer.

To further tune themselves to the changes, the specialized agencies are also acquired through merger and acquisition. Since clients themselves are globalizing, the large scale mergers and acquisitions in the advertising industry are necessitated by the growing demand for networking capabilities of large agencies to serve the communication needs of global brands.

In a nutshell, agencies align themselves with specialized people to provide a complete orchestration in serving clients’ varied communication needs. From merely an agent providing only certain creative services to the client, advertising agencies have evolved into providers of communication services and are more appropriately referred to as ‘communication agencies’ instead of advertising agencies.

Thus, the re-invented agencies provide an entire range of services that go under the name of communication. And, in the process of evolution into communication agencies, these agencies have assumed the role of being strategic partners providing multiple services. No longer are agencies now thought of as amalgamation of certain functions or services.

It is like other business organizations focused on serving its customer’s needs – which is to add value to a client’s marketing functions. As such agencies participate in the broader exercise of brand building entailing full suite of activities like formulating strategy for finding new customers, preparing marketing mix, helping in understanding the customers, getting them to try the brand, keeping existing customers, developing a long-term relationship with them, and even guiding the client in the new emerging areas in the market space like internet.

In fact, agencies are now exercising to become brand managers integrating their whole lot of services to build the brand with one voice. But how far agencies remain successful in their new role of integration is a matter of curiosity for market analysts, as the emerging trend now involves unbundling of advertising agency into creative and media specialists.

Advertising Agency – Arrangement: Centralized v/s Decentralized Arrangements

Advertising is a creative process which requires specialized skills for its creation. Also, buying media time and space to efficiently place advertisements with the media requires not only more of negotiation skills but also the capacity to combine various media types effectively.

This is particularly true in view of media proliferation and its fragmentation. Organizations which plan to use advertising as a promotion tool do make certain specific organizational arrangements to bring effectiveness in the process of advertising decision making. At the outset, these arrangements can totally be internal or external.

However, an advertiser may decide about combining the two depending upon their own capabilities and the availability of skills outside the organization. Cost and control on advertising operations are the other issues related to the making of organizational arrangements in this regard.

Centralized v/s Decentralized Arrangements:

Internally, advertising activities can be arranged in a centralized manner through advertising departments. Advertising managers as department heads look after and coordinate the advertising related activities of the entire organization. It is certain that centralized arrangement of advertising operations offers ease in communication and more top management involvement in the advertising process.

But, in case of multiple product lines, the system has problems such as, managing and coordinating advertising decisions concerning various products. Here, the decentralized system better suits the multi-product organization as the brand managers entirely look after the individual brand including its advertising.

Though it brings more flexibility in decision making, yet, different brand managers may not require specialized competencies to manage the promotional needs of their brand. With a more focused approach towards managing the brand, this system at times leads to conflict situation where various brand managers try to compete for top management attention.

Generally, organizations associate themselves with the independent specialized organizations called as ‘advertising agencies’ where brand managers or the advertising managers (as the case may be) coordinate the work between agency and the advertising organization.

Advertising agencies in detail as an independent organizational arrangement offering specialized services to create advertising, to buy media, to undertake research and so on. There are various issues relating to the incorporation of advertising agencies in the advertising process.

Advertising agencies are the facilitating organizations whose purpose is to facilitate the advertiser to effectively undertake various advertising related activities. These are the organizations whose business is to create advertising. Advertising is their specialty and also the reason for their existence.

Advertising agencies bring together the people with specialized knowledge in a single organization and provide them environment to interact and inter relate and to combine their efforts to create effective advertising. The specialized knowledge of people pertains to various areas including marketing and consumer behaviour; media and markets, and people and their communication needs.

Skilled writers, directors, artists, researchers and managers are the other types of people having specialized skills who join advertising agencies to exploit their talent and potential in the best possible way. Thus, agencies are also known as people’s business as people with specialized knowledge and skills constitute their prime assets.

Advertising Agency – Selection of Advertising Agency

Once an advertiser decides to hire an outside agency for the purpose of creating advertising and/or placing it with media through their media buying facilities, the next most important decision is to select an appropriate agency. How to select an appropriate agency? What are the criteria to establish agency appropriateness? How to collect information to establish agency appropriateness?

These are some such questions for which an advertiser needs answer while deciding for an agency. But there is no standardized procedure and criteria to work out the agency appropriateness and make a selection decision. Whatever is talked about agency selection is either based on one’s experience of selecting an agency or is available as a general source of information regarding advertising agencies in India or elsewhere.

Primarily, the published data available through media and industry circles is an important source of information for identification and short listing of the agencies. The data contains the information on an agency’s name, its location, name of the proprietors, advertising turnover, investments, list of clients handled by the agency and the other national or international affiliations of the agency.

The advertising campaigns released by advertising agencies reflect the creative approach of the agency and this is considered as one of the basis for agency selection. Advertisers also seek opinions of other advertisers while deliberating on the decision to select a particular advertising agency. Agencies’ involvement in social and civic work is another good parameter of agency selection.

Moreover, the agencies which are considered actively for selection purposes are asked to furnish the detailed information regarding:

1. Its size and corporate structure.

2. Organizational set up and number of employees.

3. Profile of key personnel.

4. Services offered by an agency.

5. Terms of business.

6. Accounts held and periods for which they are held.

7. Growth of agency’s billings.

8. Case histories of some campaigns.

In a nutshell, agencies are identified and reached through:

i. Referrals where existing clients of agency refer other clients to the agency.

ii. Presentations where new agencies are invited to make a presentation of their case.

iii. Image and reputation of the agency on the basis of advertising campaigns released by the agency.

iv. The activities of public relation and publicity undertaken by the agency.

Finally, based on the information collected through various primary and secondary sources, selection of any one of the agency involves an analysis of information across various factors such as-

a. Growth of the agency in terms of its billing size and growth pattern.

b. Field of industry experience in terms of its versatility.

c. Account turnover in terms of average age of agency clients.

d. Manpower strength and depth of their experience.

e. Agency’s philosophy of operating business, whether rigid or progressive.

f. Agency’s ability to carry out campaign planning which involves analysis and interpretation of all the facts and conditions affecting marketing problems and their ability to develop advertising objectives and competitive strategy.

g. Agency’s creative ability to create good ideas.

h. Agency’s ability to do media research and other forms of research.

i. Agency’s ability to produce and supervise all kinds of advertising and promotional material.

Although, the selection criteria are comprised of varied factors, but this is more of a subjective nature as it requires one’s judgment to decide about their appropriateness to select an agency.

Advertising Agency – Changing Concept of Agency

Ad agencies these days go beyond advertising and engage in other promotional activities such as event management, PR, direct marketing, sales promotion and so on. Top international agencies earn just about half or more than half of their income from non-traditional advertising. Merely setting up divisions to cater to the other communicational needs of the clients without possessing the necessary skills will not work.

Agencies will have to take efforts to convert them into full service providers. Agencies attempt to offer expertise in different communication channels through different companies and strate­gic alliances. Advertising agencies are repositioning them as communication consultancies. Agencies have evolved in the last couple of years.

Clients are moving towards performance based transactions. If a brand meets target expectations, organisations would be inclined to pay a certain percentage to the agency. But the fact remains that as the agency performs, the name scarcely matters.

Agency of Record (AOR) Concept:

Media buying is being centralised by heavy spenders. They appoint a single agency to buy space-time for all its brands, e.g., Unilever has appointed HTA as the central media buying agency for the Unilever group of companies though the creative work is executed mainly by Lintas.

HTA, in its turn, has set up an agency of record (AOR), Fulcrum which aims to deal with Lever brands exclusively. Media marketers now negotiate with the big buyers and that is the basis of the concept of AOR.

AOR starts investing in updated and accurate data and sets up systems which otherwise were taken for granted. It bargains for a bulk amount and is not taken for a ride by the intermediaries. So far only media planning function was given some thought, but now clients have accepted that media buying is also equally important and is a specialised activity in its own right. However, AOR sings a requiem to 15% ad agency’s commission. It is still a moot point how far an AOR can do justice to the client.

There is a lack of qualified people in this field. We do not have specially trained media buyers in India. They are just negotiators.

Media buyers may not be ad agencies. They may be media independents. This type of shift of business from agency to a non-agency is not in the interest of an ad business. Carat in India is a media independent. Media independents take recourse to pure trading, which is not always in the interest of the client.

On August 31, 1998, the Advertising Agencies Association of India (AAAI) at its 17th Annual General meeting, passed a resolution which it believes may benefit its 83-odd member agencies.

It has attempted to define centralised buying or AOR. According to its resolution, only a full-service ad agency handling the creative work for at least one brand of the advertiser, qualifies as an AOR. Besides, the media billing of the brand during the previous financial year, prior to its appointment as an AOR, shall not be less than 10 per cent of the advertiser’s total media spend or Rs. 1 crore, whichever is less.

This is an attempt to restore to the agencies the 15 per cent commission on media releases. Some AORs will now have to drop either their clients just for media buying and suffer a decline in earnings, or request them to part with the creative work for at least one of their brands.

Media independents are outside the purview of this resolution. It is to be seen how multinationals bound by their global affiliations treat this resolution. It is possible that some agencies may walk out of AAAI if the client does not oblige. This resolution comes into effect from January 1, 1999.

Career Path:

A person has to progress in terms of his career in an agency. In fact, he seems to say ‘give me my next job.’ If the person’s aspirations are not met, he chooses to leverage his equity elsewhere. If he migrates from a good company, it means he is already well-trained, and to that extent valuable.

An agency may not offer him the next job written its hierarchy just because he may not be good enough. The person may be good at the present job but may be not be suitable for a higher task. He should not be put in a situation where he is likely to fail.

At JWT, everybody is scored. The agency knows exactly where they are doing good and where they lag behind. They have to assess the happiness quotient. The second method is the appraisal system. The immediate superior has to assess your potential for the higher job.

Maybe, people migrate and improve their lot in terms of salaries and sometimes get promoted two levels up. But is the next organisation having a better lineage and work culture?

When an agency is big, there are so many departures. Some agencies are built around persons. They suffer on account of attrition. Some agencies depend on the structure and the process to deliver.

An agency can always give a designation, because it comes free. The point is whether the person so anointed is worthy and will live up to the responsibility.

Many expatriates come to work in the agencies. Their stints are shorter. It is difficult for them to operate here. Even in India, people from rural areas find it difficult to accustom to urban life. There is diversity in India across the regions.

Digital Agencies:

There are digital agencies who put ads on mobile applications and web sites by matching the surfing habits, shopping habits and profile of the consumer and product being advertised for the client using big data analysis and algorithms.

Advertising Agency – Client-Agency Relationship

The type of relationship between a client and an agency and the way this relationship has evolved over time. This relationship is a contractual type of relationship. The formal contract between the advertiser and the agency specifies clearly what the agency is expected to do, its compensation, the ownership of advertising material, and the basis of agreement termination.

As per the terms of the contract, the advertising agency provides its services to give a final form to the communication strategy and the dissemination of intended messages through the media. The dividing line between their relationships is that while advertiser retains the responsibility and corresponding risk for its business; the agency is concerned with the effective use of its creative and other relevant skills.

Therefore, the finished form of advertising is the property of the client and its copyrights lie with the client only. Hence, the agency acts like an employee or an agent to the advertiser and performs the functions of planning, preparing and placing the ad with the media.

Overtime, this relationship between the advertiser and the agency has evolved from being a mere agent to a strategic partner participating in the entire brand building process.

Client-agency relationship has always been the matter of great concern both for the advertiser and the agency, as the premise is longer the relationship, the better it is. The basis of an enduring relationship lies in creating a sense of partnership between the two, with high degree of acceptability for each other.

Initial adjustments, having mutual respect and responsiveness, sharing of information, confidence and responsibilities, sharing research findings and sales data, and short and simple briefing and approval process are the ways to build a relationship. Also, an agency is required to listen carefully to the client’s needs and not to shuffle specialized people even the advertising head from client’s account to the others.

Though building relationships is important and mutually beneficial state for client and agency both, yet severance than its endurance is a common phenomenon. This is particularly true in today’s context when markets are more competitive and prone to environmental changes occurring in shorter period of time.

With intense competition, clients want best of ideas at all time and seek innovation and speed. Agencies are, therefore, continuously on their toes to produce cutting edge campaigns one after the other. Moreover, marketers want efficient use of resources by the agency to produce high ROI and held agencies accountable for solutions other than conventional advertising.

In case agencies fail to deliver, as in large number of cases, quicker divorce becomes an easier solution for most clients. On the other hand there is a belief among many advertisers that agencies themselves do not get interested in long term vision of the brand, but only the short term course of billings.

The agencies also like to initiate the severance process as soon as they get an offer from big spender. As in the case of Electrolux and Onida, O&M bids adieu to these companies after getting LG account. Similarly, Madison switched their account from BPL mobile to Airtel media planning and buying duties in the year 2004.

The change in marketing strategy of the client, or the changes in client’s service needs due to globalization and/or need for specialty services, compensation dispute and account conflict where the agency acquires the account of rival brand are the other common reasons invoking the severance of relationship between agency and client.

Traditionally clients have always tried to minimize the scope of information leaks by not working with agencies that handle conflicting businesses, as there is great potential for ideas being lifted and used during the lag between ideation and execution. The problem of ‘leaks’ or ‘coincidences’ (as the ad industry refers to it politely) equally effects clients and the creative people.

At the outset, if the choice of agency is inappropriate, the possibility of having an enduring relationship is ruled out in the beginning and the process of search for a new agency starts very soon. Therefore, agency selection needs to be a carefully executed decision.

Advertising Agency – Different Departments: Advertising Department, Agencies, Account Management and Reasons for Hiring Outside Agencies

Advertising Department:

An advertiser advertises with a desire to promote his products and services. He tries to influence the behaviour of his prospective buyers. As he is not an expert to undertake advertising, he is driven to an advertising agency which prepares the ad campaign on behalf of the advertiser. The advertiser thus, becomes the client of the advertising agency.

The advertising agency chosen may be an in-house agency which is owned and operated by the advertiser himself. Formerly, Mudra was an in-house agency for Reliance and so was HTA for Unilever. But most advertisers choose an outside independent agency.

Whether an in-house or independent agency is chosen, an advertiser still feels the necessity of an advertising department.

The advertising department is headed by an advertising manager who is accountable to the marketing manager.

It is suitable for small businesses, the large organisations prefer a decentralised advertising department. In such a decentralised set up, each business division will have a separate advertising department. In a multiproduct company, we may have a product-type organisational structure. In such a structure, the product manager is responsible for advertising strategies for that particular group of products.

Advertising Agency:

An ad agency has a vital role to play. It converts the goals of the client into creative work which is carried by the media so as to reach the target audience. There are hundreds of agencies in India. Most of them are located in the four metros, Mumbai, Chennai, Kolkata and Delhi.

Mumbai is the Mecca of Indian advertising industry, where most of the bigger agencies are located. Advertising agencies have now spread to emerging metros like Bangalore, Hyderabad, Pune, Ahmedabad, etc.

There are smaller agencies operating at the district level in many parts of the country. Smaller agencies can be a one man show or may have a handful of people. Medium sized agencies have functional specialisation. They use the services of outsiders who freelance for them.

Large agencies are responsible for a good chunk of advertising billing of Rs. 16,000 crore per annum. They offer a full range of advertising services. Many of the medium sized agencies and larger agencies are now having foreign tie-ups in terms of equity participation and transfer of know-how.

Account Management:

This function is headed by an account manager or executive. He is a link between the agency and the client. The client in the advertising parlance is called an account. The account executive understands the advertising brief of the client and communicates it to the agency people.

Though he is employed by the agency, he has to keep the interest of client in mind. This is quite a difficult task. He uses the agency’s capability for the benefit of the client and at the same time, represents the client on behalf of the agency. He gets approval for the agency’s work from the client.

If it is a large agency, we find a number of account executives, who are supervised by the account supervisor, who in turn reports to the account manager. It is the account executive who takes an initiative in leading the creative team to develop a suitable advertising strategy with proper inputs of research and market brand conditions.

He plans the campaign and sets the budget. Once the final proposal is approved by the client, he coordinates the efforts of those who are responsible for creating the ad. Though client servicing executives dominated the advertising scene for years, clients these days also want people who actually work on the account present during pitches.

They ask specifically for creatives. Account management is now delegated to account planning departments. The best client servicing executives see themselves as brand custodians. The focus of their job should be the brand. At Lintas, they have been redesignated as brand services managers.

He plans the campaign and sets the budget. Once the final proposal is approved by the client, he coordinates the efforts of those who are responsible for creating the ad.

Reasons for Hiring Outside Agency:

Being an outside organization, advertising agencies are certainly in a position to take an objective view of advertiser’s plans and proposals with regard to brand advertising. These agencies review the advertising proposal for its various aspects like feasibility of advertising objectives, sufficiency of budgeted amount, and the relevance of particular message appeals for the product concerned and so on. Also, agencies often provide advice to the clients with regard to their advertising and promotion needs.

Advertising agencies are referred to as people’s organizations with people as their prime assets. Since creating advertising is the specialty and the reason for their existence, these agencies are able to attract and retain the people with the required talent and specialized skills and provide a team of people to conceive and execute advertising plans of specific clients.

Moreover, these agencies have regular contacts with various support systems having research specialists, art work specialists and so on. Advertiser’s gain is for saving of both time and effort, and, to some extent, cost.

Agencies work for different clients having differing advertising needs, plans and proposals. This allows agencies to gain as they acquire breadth of knowledge and expertise by working on different proposals. This benefits other advertisers too, as they get a broader perspective to the solution to their communication problems. Moreover, due to their breadth of knowledge that these agencies have, they are able to provide their services even in the riskier situations, such as the introduction of a new product.

As compared to advertiser or other alternative agencies, the outside agencies are in a better position to provide advice on whether the product should be advertised or not. And in case the product is advertised through agency’s initiatives, it acquires a certain personality and image in the market, as the creative talent of the agency sets apart the product from its competitors.

Advertising Agency – Remuneration: Commission and Fee System

Agency remuneration is an important aspect of decision making while arranging for an outside advertising agency. It is the underlying factor which determines the relationship between the agency and the advertiser.

There are two basic systems of compensating agency for its services:

I. The commission system and

II. The fee system.

I. Commission System:

This system of compensating advertising agency can be traced back to the earlier times when the agencies used to work as agents selling media time and space on behalf of the media houses. They were paid commission on their sales and the rate of commission used to be 15 per cent of sales value. The same practice is continuing even today with the only difference that 15 per cent commission on media bills is now borne by the advertiser for whom the agencies work and buy media space and time.

It is the advertiser who pays the agency 15 per cent commission on the amount billed for buying media time and space. The manner in which the payment is done can be explained with an example. If the agency places a half page ad with a newspaper costing say Rs. 100,000, the newspaper house would bill the agency for Rs. 85,000, i.e. 15 per cent less for agency commission.

The agency in turn bills the client for Rs. 100,000 and pays Rs. 85,000 to media and retains Rs. 15,000 as its commission. This is the gross income for the agency and after deducting the cost incurred in preparing, planning and placing the ad and certain other overhead expenses, the balance figure constitutes its net profit. Advertisers do not pay the commission directly to the agency. Instead, it occurs indirectly as an agency is allowed by the media to deduct 15 per cent of the billed amount as a functional discount for performing various activities benefiting the media.

Beside commission, agencies also receive direct payment from the advertiser. This payment occurs for the cost of material and for the outside services like television production facilities hired for producing the ad. Usually, agencies bills the client for cost plus 17.65 per cent of material and services.

Evaluation of Commission System:

Although 15 per cent commission system is the traditional way of compensating the agencies and is much in practice also, yet it is evaluated time and again as there are doubts and controversies in the working of this system. Therefore, as a client an advertiser always tries to make a move towards other compensation procedures, whereas agencies themselves are always in the favour of commission system.

First, the commission system of compensating agencies is tied with media cost and the more the client spends on media, the more the agency is likely to get by way of its commission. Therefore, agencies usually tend to avoid non-commissionable media and suggest/buy the expensive media, disregarding its effectiveness.

Secondly, there is a lack of equitability between the amount of commission charged and the services provided by the agency. The fixed percentage of commission has no relationship with the cost of producing ads and as such agencies also do not follow the cost accounting system of matching revenue with expenditure.

However, agencies being the proponents of commission system provide counter arguments and justify the commission system. They consider it as the most flexible system where competition is more on non-price basis. In order to compete, agencies agree for adding more services though usually for big advertisers only. Also, the fixed percentage of commission is proposed to be compared with ad effectiveness, i.e. in terms of media capacity to reach a number of audiences, and not the cost of producing ads.

After globalization in the 90’s, unbundling of full service agencies resulted into the onset of media buying agencies. These agencies offered for optimizing client’s media spend by negotiating better deals with the media. It was then that several companies have started questioning the sanctity of 15 per cent commission as it was only out of industry tradition that 15 per cent rate of commission has become a practice and in no way this constitutes the industry norm.

This clearly meant that 15 per cent commission could be shared as- 10 per cent for the media buyer and 5 per cent for the agency in a few cases, and 12.50 and 2.50 respectively in most.

However, the industry experts feel that the departure from 15 per cent commission may cause squeezing of an agency’s already tight margins and will negatively affect the agency’s capacity to provide various services including specialized ones. So, the problem in actual is not that of 15 per cent rate of commission, instead it is like paying but not getting good work, or not rewarding when really good work is done. The more concerning issue, therefore, is how to keep the agencies motivated and well remunerated.

II. Fee Based System:

In view of clients’ uneasiness with the commission based system, the trend is more towards the fee system, where clients pay to their agencies either the fixed negotiated fee amount or some combination of fee and commission. The fee is fixed on the basis of estimates of total number of service hours in all the departments required for creating advertising.

The fee is determined after multiplying total hours with hourly rate and 25 per cent is added further to cover the overhead cost and to provide for agency margins. Either during or at the end of the year, the estimated fee is adjusted for the difference between estimates and the actual cost of creating advertising.

In case of commissionable media, the client is billed for negotiated or published rate minus 15 per cent as agency commission, which is credited against the fee. If there is any discrepancy, the balance is made up either by the agency or the client as per the requirements of the situation. Cost of supplies, any material and services procured from outside the agency are billed to the client at actual cost.

Evaluation of Fee System:

The advantages of fee system or fee plus commission system are many which include:

1. The fee system is directly related to the services being provided. Accordingly, the agency can easily tailor their services to adjust with client’s needs. The clients are also more assured of being served appropriately as they are likely to get what they have paid for.

2. Since the basis to remuneration are the services and not the media cost, the possibility of agencies getting biased towards expensive commissionable media is least in the fee system.

3. The agencies also stand to gain in the fee system as there is more stability and assurance of getting adequately remunerated for the services being offered. As compared to commission system, fee system does not require on the part of agency to provide any kind of justification for the services being rendered.

The disadvantages of Fee System Include:

1. Competition among the agencies is likely to be more price based rather than service based. Whereas in commission system, agencies tend to provide quality services in order to justify the amount of 15 per cent commission.

2. The fee system works on the basis of ‘the lower the fee the better it is’ concept and the quality of services is likely to suffer.

3. Agencies also, at times, tend to loose as they might get into the situation of doing more work for the client than is needed. This results into over servicing the client for the same fee level.

4. The determining of fee structure on the basis of an estimation of the number of hours to be worked might lead to over indulgence of the client in agency’s internal operations. And this may tend to harm the client-agency relationship.

5. Many agencies and marketers find the entire process of developing a fee based system too time consuming and complex.

6. Although fee system is considered a better way of making payments, it requires a change in mind sets and training to the people on how to do it. This is particularly true in the context of Indian ad industry.

Cost Plus Agreement:

This is another technique of remunerating the agency for their services. The basis for cost plus agreement system is also the services or the work done but with the difference that the cost plus system requires the agency to keep detailed record of the services and the cost it incurs in rendering those services to the client.

The cost of overhead expenses and the mark up for profit are added further to the cost of services to determine the amount finally billed to the client. Clients prefer the fee and cost plus basis of remuneration due to the transparency of these systems. The clients can work out easily what they are paying and what they are getting in the form of services.

The agencies, however, find these systems more difficult to operate as either they require detailed accounting of cost being done with utmost care or the accurate estimation of service hours. And with such systems of remuneration the process of bidding advertiser’s account become more tedious.

Since, the remuneration system is tied either to services or the cost of services it tends to works against the higher level of creativity to prevail while creating advertising and placing it with the media.

Performance Linked Remuneration:

In view of the problems with both commission and fee/cost based system and also that clients have become more demanding for accountability on the part of their agencies, the move is now more towards performance based remuneration. Instead of services to be offered agencies are being tied to their performance, i.e. how well they meet their pre-determined performance goals.

Depending upon the situation these performance goals are usually determined in terms of measures such as sales, market share, quality of creative work done and so on. To the extent the performance goals are fulfilled, agencies are paid either through commission, or fee, or bonus, or incentives or some combinations of these.

From agency’s point of view the move away from commissions is inevitable and has far reaching implications for agency business. Agencies, especially the large agencies, aim for a satisfaction of total communication needs of the clients. But they are finding it difficult to avail the growth opportunities brought out by the other specialized disciplines as a solution to satisfy total communication needs of the clients.

With the squeezing margins and the rising overheads and other expenses, these agencies feel the growing business propositions as unviable for them and have to get restricted to their low margin business of advertising.

In such situations agencies plan to respond by strengthening out their traditional operations, collaborating with others to bring together their efficiencies and so to have benefits of scale by bidding out business from many advertisers. Thus, instead of margin, volume of business becomes impetus for their growth.